It’s the end of 2019 Canadian real estate tax season.
This is also the end of my 16th tax season. I’ve learned a few things along these 16 years of doing taxes and hopefully, it helps you a bit too.
1. Tax planning is done ahead of time, not on April 29
One client of ours would like to sit down to have a meeting to strategize on April 29 about his tax return.
This is tough because of two reasons: 1) it’s arguably the busiest time of the year for accountants who file taxes; 2) we’re filing the previous year’s return, nothing much can be done on April 29 to change your tax position. ☹️
2. Documentation matters
One of our clients got audited on his rental loss from 2017 during the Canadian real estate tax season.
He rented out his investment property to his friend and this friend never paid him the full lease amount.
Worse yet, this friend never paid for the utilities. The lease agreement specified that utilities are the tenants’ responsibilities.
My client legitimately lost a bunch of money on this property.
But the loss got denied.
He was not able to produce documentation supporting his loss. He called his “friend” to chase for rent, but there was no paper trail, no email trail, nothing.
He asked for his “friend” to pay the utilities over the phone, he didn’t have a paper trail.
Everything got disallowed, including the utilities that got paid directly out of his pocket.
The first lesson learned, do not rent your investment to “a friend”.
The second lesson learned, keep documentation. Email, notice to collect rent, notice filed with Landlord Tenant Board, Small Claims Court submission, etc. must be collected and well documented.
If you sent text messages, keep a screenshot of your text messages.
Documentation matters. Documentation is a must to “earn” your deduction.
3. Bookkeeping should be done regularly
Bookkeeping should be done regularly. It is a hassle, don’t get me wrong. But if you do it regularly, you can notice the errors or at least measure the performance of your properties early.
You don’t have to work 60 hours “for your accountant” the week before the filing deadline.
If you do bookkeeping right (you should keep up your books every quarter as a minimum), things can be a lot smoother when you file your taxes.
It can be as painless as simply uploading the file. Your tax return is done in the next week or so!
This also means that you have plenty of time to make payment to CRA if you have a large payable.
If you are wondering how to do your bookkeeping more efficiently and effectively using excel or other online software systems, we are going to host a couple of courses in June.
Click this link to sign up on the waitlist.
4. Large renovation and expenses do not necessarily mean tax refund
We have one client who spent over $150K on the renovation. The project lasted for over 2 years.
We could not “deduct” this expense in the same way as you may think.
She wouldn’t see the effect of this $150K “write-off” until she sells this property years and years down the road.
This $150K renovation doesn’t automatically give her a huge tax refund. It is added to the cost of the rental property.
When she sells, she can claim it as part of the cost against the sale proceeds.
Carrying costs such as mortgage interest, insurance, property taxes during this 2 year renovation period have to be added to the cost of the building. Again, when she sells, she can claim it against the sale proceeds.
It is not an immediate write-off. It is deducted in the future when you sell.
5. If you have a balance payable, complete your return early!
If you are expecting a balance payable, make sure you submit your paperwork early to your accountant.
This guarantees that you have sufficient time to complete your return, file it on time, and avoid the late filing penalty.
Late filing penalty is calculated based on balance owing. 5% on balance owing when we submit the return 1 day late.
It can add up quickly if you have a large payable.
Hopefully, you will be more prepared for the next Canadian real estate tax season!
Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant